Teva takes big risk in bidding for Mylan

Shiri Habib-Valdhorn

The market received Teva's offer positively but many obstacles must be overcome.

Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) CEO Erez Vigodman spent his first few months in the job putting "the company's house in order." In other words, reorganizing Teva's internal infrastructure and continuing to streamline the company. In the past few months, Teva has returned to extra-organizational growth, and even announced the relatively large acquisition of Auspex Pharmaceuticals for $3.5 billion.

However, in the current frenzy of mergers and acquisitions in the global pharmaceuticals sector, the expectations from Teva were for something much bigger. The market began to talk about a deal which would transform the face of Teva and marked out Mylan as a possible target (pushing up Mylan's share price). The rumors and speculation became reality today as Teva made an official offer to acquire Mylan, in a potential far bigger deal than anything Teva has ever been involved in.

The market's response has been positive and who remembers that just a few days ago the US Food and Drug Administration (FDA) approved for marketing the first generic rival to Teva's branded and most profitable multiple sclerosis treatment Copaxone. That said the risks are high. Firstly, Mylan had already officially announced that it opposes being sold and even added a "poison pill." If Teva insists on carrying out a hostile takeover what would that entail? The shareholders will find out in the coming weeks.

And even if the deal jumps all the existing obstacles, including approval by Mylan's shareholders and a green light from the antitrust regulators - Teva will still need to significantly increase its debt (and possibly even suffer a downgrading of its debt rating). It will the need to absorb a huge company with 30,000 employees and dozens of production sites. A substantial part of the management efforts of Vigodman and his fellow senior executives at Teva will be devoted to this topic, at least in the short term. The burden of proof is on Teva.

Over the years, Teva has implemented several acquisitions that strengthened its capabilities in branded drugs. However, this, the potentially largest acquisition of all, brings it back to its traditional activityin generic pharmaceuticals. Over 80% of Mylan's revenue is from generic drugs. Goldman Sachs recently published a survey in which analyst Jami Rubin said there was room for consolidation in the US generics market among both wholesalers and generic companies.

She believed, following a talk with Teva president and CEO Global Generic Medicines Sigurdur Olafsson that he has played a major role in the emerging deal and was possibly the prime mover behind it. Olafsson is a highly respected figure in the global pharmaceuticals market and together with Vigodman, he will need to meet the market's expectations from this acquisition.

All the acquisitions conducted by Teva in recent years, and all its strategic steps were designed to diversify its operations, and reduce dependency on Copaxone. The multiple sclerosis treatment is responsible for 20% of Teva's revenue and half its profits. The acquisition of Mylan is also not exceptional within this context. However, if in the past, the risks posed by a generic Copaxone were distant and unclear, nowthey arereal.

Last week, the FDA approved Copaxone's first generic rival and if launched it would cut $30-50 million from Teva's operating profits each month. Mylan has also developed a generic version of Copaxone that has yet to be approved and it is possible that the US Federal Trade Commission will demand that Teva sell the generic Copaxone that Mylan has developed to another company, as a condition for completing the deal.

Teva could be helping the Tel Aviv Stock Exchange where it is by far the largest company followed by Perrigo Company (NYSE:PRGO; TASE:PRGO). The TASE was greatly concerned that Perrigo would be acquired by Mylan (which submitted an offer two weeks ago). Now Teva's offer reduces the likelihood of that deal going through and perrigo delisting from the TASE. The TASE can breathe a sigh of relief, but it still has much work to do in improving trading volumes and interest from investors and companies.

Published by Globes [online], Israel business news - - on April 21, 2015

© Copyright of Globes Publisher Itonut (1983) Ltd. 2015

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